ECN 260B: International Macroeconomics

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Course Syllabus

Lecture Notes 

• Lecture 1: Intertemporal Models of the Current Account 
• Lecture 2: the Saving and Investment Puzzle
• Lecture 3: International Business Cycles
• Lecture 4: International Portfolio Diversification and Risk Sharing
• Lecture 5: Equilibrium Exchange Rate Determination
• Lecture 6: Monetary Policy
• Lecture 7: Pricing to Market
• Lecture 8: Risk and Exchange Rates
• Lecture 9: Optimal Monetary Policy and International Coordination
• Lecture 10: Asset Valuation Effects
• Lecture 11: Optimal Currency Areas
• Lecture 12: Trade Costs

Old Exams

spring 2007	solutions
spring 2006	solutions

Readings Available Electronically:

• Review of dynamic programming

Lecture 1: Intertemporal Models of the Current Account

• Dornbusch, Rudiger (1983) “Real Interest Rates, Home Goods and Optimal External Borrowing,” Journal  of Political Economy, 91(February), 141-53. 
• Bergin, Paul R. and Steven Sheffrin (2000) “Interest Rates, Exchange Rates and Present Value Models of the Current Account,”  The Economc Journal 110 (April), 535-558. 
• Gruber, Joseph W. (2004) “A Present Value Test of Habits and the Current Account,” mimeo, Johns Hopkins University (November).
• Nason, James M. and John H. Rogers (2006) “The Present Value Model of the Current Account Has Been Rejected: Round up the Usual Suspects?”  Journal of International Economics 68, 159-187 (working paper version).
• Engel, Charles and John Rogers (2006) "The U.S. Current Account Deficit and the Expected Share of World Output," Journal of Monetary Economics53, 1063-1093.
• Sheffrin, Steven, and Wing-Thye Woo (1990) “Present Value Tests of an Intertemporal Model of the Current Account” Journal of International Economics 29, 237-253.
• Campa, J.M. and A. Gavilan (2006), “Current Accounts in the Euro Area: An Intertemporal Approach,” working paper.

Lecture 2: The Saving and Investment Puzzle

• Feldstein, Martin, and Charles Horioka (1980) “Domestic Savings and International Capital Flows,” Economic Journal 90 (358) June, 314-329.
• Baxter, Marianne and Mario Crucini (1993) “Explaining Saving-Investment Correlations,” American Economic Review, 83 (3) June, 416-36. 
• Nason, James M. and John H. Rogers (2002) “Investment and the Current Account in the Short Run and the Long Run,” Journal of Money Credit and Banking, 34, 967-86

Lecture 3: International Business Cycles

• Mendoza, Enrique G. (1991) “Real Business Cycles in a Small Open Economy,” American Economic Review, 81 (4) September, 797-818. 
• Backus, David K., Patrick J. Kehoe and Finn E. Kydland (1992) “International Real Business Cycles, “ Journal of Political Economy, 100 (4) August, 745-775. 
• Kollmann, Robert (1996) “Incomplete Asset Markets and the Cross-Country Consumption Correlation Puzzle,” Journal of Economic Dynamics and Control, 20 (5) May, 945-961.
• Burstein, Ariel, Chris Kurz and Linda Tesar (2005) “Trade, Production Sharing and the International Transmission of Business Cycles,” working paper.

Lecture 4: International Portfolio Diversification and Risk Sharing

• French, Kenneth R. and James M. Poterba (1991) “Investor Diversification and International Equity Markets,” American Economic Review, 81 (2) May, 222-226. 
• Tesar, Linda L. and Ingrid M. Werner (1995) “Home Bias and High Turnover, “ Journal International Money and Finance, 14 (4), 467-492. 
• Baxter, Marianne and Urban J. Jermann (1997) "The International Diversification Puzzle Is Worse Than You Think," American Economic Review, 87 (1), 170-180.
• Bottazzi, Laura, Paolo Pesenti, and Eric van Wincoop (1996) "Wages, Profits and the International Portfolio Puzzle," European Economic Review, 40, 219-254.
• van Wincoop, Eric (1999) "How Big Are Potential Welfare Gains from International Risksharing?" Journal of International Economics, 47, 109-135.
• Engel, Charles and Akito Matsumoto (2005) "Home Bias in Equities Under New Open Economy Macroeconomics," University of Wisconsin mimeo.
• Kollmann, Robert (2006) “International Portfolio Equilibrium and the Current Account,” working paper.
• Devereux, Michael and Alan Sutherland (2006) “Solving for Country Portfolios in Open Economy Macro Models,” working paper.
• Van Wincoop, Eric and Cedric Tille, (2007) “International Capital Flows,” NBER Working paper 12856.

Lecture 5: Equilibrium Exchange Rate Determination

• Alan M. Taylor & Mark P. Taylor (2004). "The Purchasing Power Parity Debate," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 135-158, Fall.
• Lothian, James and Mark Taylor (2006). "Real Exchange Rates Over the Past Two Centuries : How Important is the Harrod-Balassa-Samuelson Effect?" working paper.
• Fisher, E. and J. Park (1991) “Testing Purchasing Power Parity Under the Null Hypothesis of Co-integration, The Economic Journal 101, November, 1467-1484.
• Frankel, J. and A.K. Rose (1996) “A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries,” Journal of International Economics 40, 209-224.
• O’Connell, P (1998) “The Overvaluation of Purchasing Power Parity, Journal of International Economics, 44, January, 1-19.
• Engel, Charles (1999) “Long-run PPP May Not Hold After All," Journal of International Economics. 
• Imbs, Jean, H. Mumtaz, Morten Ravn and Helene Rey (2005) “PPP Strikes Back: Aggregation and the Real Exchange Rate,” Quarterly Journal of Economics 70, 1-43.
• Burstein, Ariel, Martin Eichenbaum and Sergio Rebelo (2005) “Large Devaluations and the Real Exchange Rate,” with, Journal of Political Economy.
• Stockman, Alan C. (1980) “A Theory of Exchange Rate Determination,” Journal of Political Economy, 88 (4) August, 673-698. 
• Helpman, Elhanan (1981) “An Exploration in the Theory of Exchange-Rate Regimes,” Journal of Political Economy, 89 (5) October, 865-890. 
• Meese, Richard and Kenneth Rogoff (1983) "Empirical Exchange Rate Models of the Seventies: Do they fit out of sample?" Journal of International Economics 14, 3-24.
• Mark, Nelson C. (1995). “Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability.” American Economic Review 85, 201-218.
• Mark, Nelson C., and Donggyu Sul (2001). “Nominal Exchange Rates and Monetary Fundamentals: Evidence from a Small Post-Bretton Woods Sample.” Journal of International Economics 53, 29-52.
• Flood, Robert and Andrew Rose (1999) "Understanding Exchange Rate Volatility Without the Contrivance of Macroeconomics," The Economic Journal 109, 660-672.
• Engel, Charles and Kenneth West (2005). "Exchange Rates and Fundamentals," Journal of Political Economy 113, June 2005, 485-517.

Lecture 6: Monetary Policy

• Ahmed, Shaghil, et. al. (1993) “International Business Cycles,” American Economic Review, 83 (3) June, 335-39.
• Kim, Soyoung and Nouriel Roubini (2000) “Exchange Rate Anomalies in the Industrial Countries: A Solution with a Structural VAR Approach,” Journal of Monetary Economics 45, 561-586.
• Faust, Jon and John H. Rogers (2003) “Monetary Policy’s Role in Exchange Rate Behavior,” Journal of Monetary Economics 50, 1403-1424.
• Alvarez, Fernando, Andrew Atkeson, and Patrick Kehoe (2002) “Money, Interest Rates, and Exchange Rates with Endogenously Segmented Markets,” Journal of Political Economy 110, 73-112.
• Obstfeld, Maurice and Kenneth Rogoff, (1995) “Exchange Rate Dynamics Redux,” Journal of Political Economy, 103 (3) June, 624-660. (available online as NBER working paper version or as J-store document )
• Svensson, Lars E. O. and Sweder van Wijnbergen (1989) “Excess Capacity, Monopolistic Competition, and International Transmission of Monetary Disturbances,” Economic Journal, 99 (397) September, 785-805.
• Kollmann, Robert (2001) “The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: A Quantitative Investigation," Journal of International Economics 55, 243-262.
• Lane, Philip R. (2001) “The New Open Economy Macroeconomics: A Survey,” Journal of International Economics 54, 235-266.

Lecture 7: Failures in the Law of One Price

• Betts, Caroline and Michael B. Devereux (1996) “The Exchange Rate in a Model of Pricing-to-Market,” European Economic Review, 40 (3-5) April, 1007-1021.
• Obstfeld, Maurice and Kenneth Rogoff (2000) “New Directions for Stochastic Open Economy Models,” Journal of International Economics, 50, 117-53.
• Betts, Caroline and Michael B. Devereux (2000) “Exchange Rate Dynamics in a Model of Pricing-to-Market,” Journal of International Economics 50, 215-44. 
• Chari, V.V., Patrick J. Kehoe, and Ellen R. McGrattan (2003) “Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?” NBER Working Paper 7869. Forthcoming in Review of Economic Studies.
• Bergin, Paul R. and Robert C. Feenstra (2001) “Pricing to Market, Staggered Contracts, and Persistence in the Real Exchange Rate,” Journal of International Economics 54, 333-359.
• Crucini, Mario, Chris Telmer and Marios Zachariadis (2005) “Understanding European Real Exchange Rates,”  American Economic Review 95, 724-738. (working paper version)

Lecture 8: Exchange Rate Risk and Welfare

• Engel, Charles (1996)   “The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence,” Journal of Empirical Finance
• Backus, David K., Allan W. Gregory and Chris I. Telmer (1993) “Accounting for Forward Rates in Markets for Foreign Currency,” Journal of Finance 48, 1887-1909. 
• Obstfeld, Maurice, and Kenneth Rogoff (2001) “Risk and Exchange Rates,” mimeo. Also NBER Working Paper #6694.
• Bacchetta, Philippe and Eric van Wincoop (2000) “Does Exchange-Rate Stability Increase Trade and Welfare?” American Economic Review 90, 1093-1109.
• Corsetti, Giancarlo and Paolo Pesenti (2001) “Welfare and Macroeconomic Interdependence,”  Quarterly Journal of Economics, 421-445.

Lecture 9: Optimal Monetary Policy and International Policy Coordination

• Oudiz, Giles and Jeffery Sachs (1984) “Macroeconomics Policy Coordination Among the Industrial Countries,“ Brookings Papers on Economic Activity 1, 1-64.
• Obstfeld, Maurice and Kenneth Rogoff (2002) “Global Implications of Self-Oriented National Monetary Rules.” The Quarterly Journal of Economics 117, 503-535. (On webpage as mimeo)
• Devereux, Michael B. and Charles Engel (2003) Devereux, Michael B. and Charles Engel, 2003, “Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibility,” Review of Economic Studies 70, 765-783. (on webpage as mimeo)    
• Benigno, Giancarlo and Pierpaolo Benigno (2003) “Price stability in Open Economies,”Review of Economic Studies, 70, 743-764.  . (On website as mimeo)
• Benigno, Pierpaolo (2002) “A Simple Approach to International Monetary Policy Coordination,” Journal of International Economics 57, 177-196. 
• Clarida, R., J. Gali and M. Gertler, 2001 , “Optimal monetary policy in open versus closed economies,” American Economic Review 91, 248-252. (as mimeo)
• Gali, Jordi and Tommaso Monacelli (2005) "Optimal Monetary Policy and Exchange Rate Variability in a Small Open Economy," forthcoming in Review of Economic Studies 72, 707-734. (as mimeo)

Lecture 10: Asset Valuation Effects

• Lane, Philip and Gian Maria Milesi-Ferretti (2003) “International Financial Integration,” IMF Staff Papers 03/86.
• Lane, Philip and Gian Maria Milesi-Ferretti (2005) “Financial Globalization and Exchange Rates,” IMF Working Paper 05/3.
• Gourinches, Pierre-Olivier and Helene Rey (2005) “International Financial Adjustment,” NBER Working Paper 11155.
• Tille, Cedric (2005) “Financial Integration and the Wealth Effect of Exchange Rate Fluctuations,” working paper.

Lecture 11: European Monetary Union

• Canzoneri, Matthew B. and Carol Ann Rogers (1990) “Is the European Community an Optimal Currency Area?  Optimal Taxation versus the Cost of Multiple Currencies, American Economic Review, 80 (3) June, 419-433. 
• Obstfeld, Maurice (1998) “EMU: Ready or Not?” NBER Working Paper #6682, August.
• Benigno, Pierpaolo (2003)   “Optimal Monetary Policy in a Currency Area,” Journal of International Economics, 63, 293-320.
• Engel, Charles (2000) “Local Currency Pricing and the Choice of Exchange Rate Regime,” (Formerly known as A Retrial in the Case Against EMU) European Economic Review, 44, 1449-1472.

Lecture 12: Trade Costs

• Obstfeld, Maurice and Kenneth Rogoff (2000) “The Six Major Puzzles in International Macroeconomics: Is there a Common Cause,” in Ben Bernanke and Kenneth Rogoff eds. NBER Macroeconomics Annual, Cambridge: MIT press. (Also NBER Working paper 7777).
• Dumas, Bernard (1992) “Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World,” Review of Financial Studies 5, 153-180.
• Melitz, Marc (2003) , "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica 71: 1695-1726. (on website as mimeo)
• Ghironi, Fabio, and Marc J. Melitz (2005) , "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," Quarterly Journal of Economics 120, 865-915 (working paper version).
• Bergin, Paul, Reuven Glick and Alan Taylor (2006) "Productivity, Tradability, and the Long Run Price Puzzle," Journal of Monetary Economics 53 (8),  2041-2066
• Bergin, Paul and Reuven Glick (2003) , “Endogenous Tradability and Macroeconomic Implications” NBER Working Paper 9739.
• Ruhl, Kim (2003) , “Exporting under Uncertainty: Reconciling Estimates of the Armington Elasticity” U. Minnesota mimeo. (On website)
• Katheryn Russ (2005), "The Endogeneity of the Exchange Rate as a Determinant of FDI: A Model of Money, Entry, and Multinational Firms," Johns Hopkins mimeo.

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